What Your Carwash Margins Should Be and How to Achieve Them
What Your Carwash Margins Should Be and How to Achieve Them
Carwashes can produce abnormally high cash flow and profit margins in comparison to most other businesses. The cash flow margins you can expect depends on a handful of factors; how many car washes you own, what types or models of car washes you own, how many cars you are washing, and a handful of macro and micro geographically and site related factors. Depending on these factors, your car washes should be producing anywhere from 40% to 65% adjusted cash-flow margins (otherwise and commonly known as EBITDA margins).
The two largest determinants of achievable and expected cashflow margins for your car washes are:
Express carwash adjusted cashflow margins can range from 45% to 67%. Single site express exterior car washes can generate between 45% and 63% adjusted cashflow margins, primarily depending on the volume of cars the sites wash.
Flex service carwashes can produce anywhere between 38% and 60% adjusted cash flow margins. Single site owners of flex-service car washes, depending on the number of cars the site is washing, can realistically expect to produce anywhere from 38% and 48% adjusted cash flow profit margins. For more information on the different types of car washes and carwash models reference our piece on the different types of car washes.
Full-Service car wash owners are able to produce adjusted cash flow margins ranging from 35% to 58%, with the primary driver within that range being the number of car wash sites they own and the volume of cars they are washing on average per site. The owner of a single site full-service car wash can expect margins of as low as 35% if the site is generating less than $1mm in gross sales, whereas single site full-service car wash owners can expect margins as high as 48% if their single site is generating over $1.5mm in gross sales.
In-Bay Automatic (often referred to as “IBA”) and Self-Service carwashes can generate 50% to 67% EBITDA, or adjusted cash flow margins, for the owner. This is primary dependent upon how many of these types of car washes the owner owns, as well as the number of cars the sites are washing, and therefore the total gross sales per site. A single site owner of this wash model and type can expect margins to vary anywhere from 50% to 60%. On the whole and including multi-site owners of this wash model and type, these washes are capable of producing between 50% and 67% margins.
There are two primary reasons you might not be achieving the cashflow margins your car washes are capable of:
If you are not achieving the profit margins that your car washes are capable of, contact us for a free and confidential consultation with us at Car Wash Advisory to determine what’s holding your washes back from producing the cash they’re capable of producing.
The first of the two major variables that may be preventing your car washes from attaining the cashflow margins they are capable of is forgoing potential revenue, or in other words, leaving money on the table. If significant potential revenue, or potential gross sales, are being left uncaptured, it nearly mandates your washes’ experience lower than possible and lower than optimal margins. There are two main ways in which you might be leaving revenue and sales on the table.
On the most surface of bases, if your car wash(es) are washing less cars than they otherwise could be, you will be running into the issue of restricted volume, which will in turn likely lead to subpar margins. Common causes of restricted volume include:
The other primary culprit of forgoing potential gross sales at your car washes is having a suboptimal effective average ticket price. Effective average ticket, being defined as the average dollars of realized gross sales per car that is washed. This is different than what many if not most car wash paystation and autocashier, as well as tunnel controller product providers state on their most commonly used by operators reports, most notably what are referred to as “General Sales Reports”. Effective Average Ticket Price differs in that it strips out any implications or skewing that may be caused by your car washes’ unlimited monthly membership programs and your membership bases’ average utilization or redemption rate.
The most common causes of having a suboptimal average effective ticket at your car wash improper pricing menus and option selections for your customers.
We’ve covered sales, or money coming into the proverbial register. The other side of the profit equation is costs, or the money being spent to generate sales. It’s in this that the second primary way to increase margins manifests. There are several usual suspect line items and cost categories where car wash owners are likely overspending and therefore present opportunities for business cost reduction and without having a negative impact on any other parts of your carwash business.
Chemicals are complicated. There are two main variables pertaining to chemicals, only one of which is to be discussed here in context of chemical cost overspending. The two main sides of chemicals are:
Common industry resources, thought leaders in the car wash industry, as well as direct suppliers; although each provide slightly different figures, the average cost of chemical per car running through a car wash in the U.S. is somewhere around $0.40 and $0.65 per car washed. The chemicals, and the amount of chemical a car wash owner uses per car washed is often times too unique for generalist and broad-sweeping statements to be made and from which conclusions to be drawn.
However, the second of the two, being how much you are paying for your car wash chemicals and how you order them, this is worth discussing and is a major driver in increasing your car wash profit margins to where they should and can be.
Chemical suppliers, like any supplier in such an industry, are willing to negotiate if one is willing to provide them with something they are after in return, that being larger order quantities. It’s a good thing that ordering in larger quantities benefits you as the owner. Negotiating your ordering frequency and your pricing with your chemical providers and suppliers can have an immense impact on your true cash flow margins as the owner. Getting these to be optimized is well worth the time spent and with car wash chemicals on average representing 8.5% - 10% of a car washes total cost basis, there is a larger impact for most owners and operators than many initially think.
Most car washes in the U.S. have some level of financing and debt; whether through a traditional mortgage, an SBA 7(a) or SBA 504 loan, through a conventional mortgage, or even through equipment manufacturer specific financing. When there is money to be saved on debt costs it is more times than not the largest single lever impact of all cost reductions methods. Saving 1% on a $5mm loan equates to $50k of interest per year alone. Yet still, the savings can be had in far larger and more intricate ways through navigating your car washes debt capital structure and financing arrangements with an expert eye.
Above and beyond the most simplistic manner of reducing your debt costs via getting a lower interest rate on your debt, there likely ways to lower your debt service payments to an even larger extent without even reducing your car wash loan interest rate, capitalizing on a longer-term amortization. The amortization terms and period of your loan(s) have an inordinately high level of impact on your cash flows. We at Car Wash Advisory have come across countless instances where a multi-site owner is currently being held to a shorter than optimal (and attainable) amortization schedule on a $20mm senior conventional loan facility. In these instances, without changing interest rates at all, proper refinancing, even if at the same interest rate, but to a proper and readily available 22.5-year amortization schedule, will reduce their annual debt payments and service by ~$525k per year alone! That’s a 40% reduction in their annual debt costs, without even changing the interest rate.
There are a plethora of other methods and ways to significantly reduce the amount you are paying as a carwash owner as it relates to debt. The nuances are plentiful, and this is just a taste, but let it suffice to say that reduction in debt costs relating to your car washes is one of, if not the largest, lever that can be utilized to reduce unnecessary spend and therefore increase your car washes’ profit margins.
For a more detailed and thorough resource on car wash financing, be sure to see our definitive guide on carwash financing. For those just getting into the industry and trying to get ahead of the game by proactively researching and exploring common margin draining pitfalls that one should avoid, be sure to see our guide on how to obtain car wash financing. This resource on obtaining carwash financing should be of significant help.
Proper insurance is a necessity for all businesses and car washes are no exception to this. Having business general liability insurance, along with the other supplementary and standard business-related insurance policies all car washes and car wash owners should have, typically equate to 1 – 2% of total car wash sales, or roughly $15k per site. Although not the largest of expenses, most car wash owners are paying more than they need to be for car wash business insurance and many others don’t have the proper and necessary coverage levels of insurance. Often, it’s both.
A look into your current car wash business insurance expense can save you and your wash a few thousand dollars a year per site.
Credit card processing fees are a larger cost than ever before for car wash companies. Depending on your car washes setup, model, and specific geography, non-cash carwash sales typically amount to roughly 80% of total gross sales. Credit card processing fees should sit at roughly 2.5 – 3.0% on non-cash transactions.
If you as a car wash owner are paying more than this, EBITDA is slipping through the cracks for unnecessary and preventable causes. To put this into perspective, an owner of three express exterior car washes, each doing $1.5mm of gross sales per site, and each having 80% of their sales made up of electronic and non-cash payments can often and easily save ~$35k a year by simply arranging for a better credit card processing setup.
Finally, we arrive at the largest single cost line item of most all car washes – Labor and Payroll. Depending on wash model, services offered, setup, and volume of cars being washed, it’s not uncommon for labor and payroll expenses (excluding owner compensation), to amount to upwards of over 40% total gross sales. With labor being the single largest cost line item for most car washes there’s a commensurately large amount of potential savings to be made by examining and improving this line item. The absolute key though is that you don’t have to (nor in many cases should you) reduce headcount, headcount hours, number of employees, nor hourly or annual wages to do so.
Carwashes staffing levels should be regularly and routinely examined and scrutinized. However, you don’t want to be light on labor when you need it most and during your busiest times. Although reduction of headcount is sometimes a lever that needs to be pulled in order to maximize your car washes margins, in most many cases it doesn’t and shouldn’t. In these cases, payroll processing and related expenses should be heavily scrutinized to ensure you as a car wash owner and employer are not overspending on these associated fees and soaking up potential cash flow in doing so.
The first step in ensuring your car washes are achieving the profit margin and cash flow margin levels they are capable of is exploration. Specifically, learning where your current margins sit and where they can and should be. This exploratory exercise and analysis is something we offer as a service here at Car Wash Advisory. We offer this not just for those who are looking to sell their car wash businesses sometime in the definable future, but also and by way of equal importance, to those car wash owners that have no foreseeable plans to sell their car washes. The benefit is immediate and tangibly felt via the day-to-day profit and cashflow lift you can experience.
Once current and potential profit margins for your washes are properly framed, the next step is to put a plan into action to achieve such. Steps taken often involve both main levers for margin expansion; capturing any currently unrealized revenue and eradicating any unnecessary cash zapping spend.
The car wash industry is a unique and quite spectacular one for many reasons. One of those reasons is the unbelievably attractive and profit and cash flow margins it affords to owners when done right and managed correctly.